Nursing homes act as a cost-effective way to enable patients with injuries, acute illnesses or postoperative care needs to recover in an environment outside a hospital.

Nursing homes also serve a second purpose in caring for residents who have chronic illnesses and long-term care needs. These people will probably never return home and may die in the nursing home, in a hospital or in hospice.

For many chronic care recipients, long term care is an evolving process of losing more and more physical or mental capacity. A nursing home is usually the last stop in this process. The nursing home is equipped to handle medical problems, disability and in some cases behavior problems that cannot be handled by any other provider. Because there are now so many other options for care prior to a nursing home, the trend is that residents on average are much sicker and older than in the past

About 91% of all nursing home residents are age 65 and older, and 98% of these people use Medicare as their primary insurance. So any change in the way Medicare handles long-term care costs will affect the utilization of nursing homes. The Balanced Budget Act of 1996 and Medicare's subsequent implementation of The Prospective Payment System, has shortened hospital stays and as a result, more and more elderly patients are spending time in a nursing facility before they are well enough to go home.

Many elderly care recipients, for whom Medicare is not an option, are in a nursing home because they don't have money to pay for other types of care. These people are receiving care, paid in-part or fully by Medicaid, or they are spending their assets in order to qualify for Medicaid.